Equites rallied amid a reprieve in the trade war between the US and China with hopes for a broader agreement in the intermediate future. The three-month lowering of import duties will give more time to negotiate a more comprehensive trade deal. While the agreement is only temporary, a framework for continued discussion may have been established.
Many market participants believe “a very steep hill needs to be climbed to get an actual agreement,” the 90-days gives a much needed “cooling off period” and time for companies/the economy to develop contingencies if trade talks again goes nowhere.
Commenting about the Treasury market, the number of rate cuts has been pared, causing a surge in short-term yields. Longer term Treasuries also sold off. Seven trading days ago, four interest rate cuts were priced in. Today just over two. Over the past week the two-year Treasury or the instrument most sensitive to monetary policy has climbed from 3.55% to 3.99% at the time of this writing
This volatility is unprecedented and is a direct result of the lack of liquidity in the Treasury market amplified by extreme uncertainty where 95% of trades are done algorithmically based upon a 5-word headline. This is nuts!
Today the CPI is released. Will sentiment change once again? How much have the tariffs impacted prices? Analysts are expecting a 0.3% increase in both the headline and core rate, up from -0.1% and 0.1%. respectively, the month before.
Federal Reserve Governor Adriana Kugler stated yesterday the tariff policies “are likely to boost inflation and weigh on economic growth even with the recently announced temporary reductions in levies on China.”
Kugler noted that average tariff rates are “still much higher than they have been in many decades” and “will impact growth and inflation.” She further commented “my basic outlook may have changed in terms of extent, the magnitude, but not in the direction if today’s announcements generate meaningful policy.”
What will happen today?
Last night the foreign markets were mixed. London was down 0.02%, Paris up 0.02% and Frankfurt up 0.03%. China was up 0.17%, Japan up 1.43% and Hang Seng down 1.87%.
Dow and NASDAQ futures are down 0.35% and flat, respectively after the release of the CPI. United Health Care is weighing heavily on Dow futures given current headlines. The data indicated that inflationary pressures is not as robust as feared as both the headline and core statistics were 0.1% lower than expected.
The short end of the Treasury market gapped lower in yield while the 10-year remained essentially unchanged following the release of the data. The current yield on the 109-year is 4.45%.
